Q3 results: Digital transformation takes centre stage as TCS enters 2016

Image: Shailesh Andrade / Reuters

Tata Consultancy Services (TCS) Chief Executive N. Chandrasekaran

Tata Consultancy Services Ltd's profits rose in its third quarter, after financial clients such as Britain's Nationwide Building Society stepped up "digital transformation" orders with India's biggest software services company, and sales rose in the company's biggest markets - America and Europe. Profits rose 12.2 percent to Rs 6,110 crore ($926 million) in the three months ended December versus Rs 5,440 crore in the year-earlier quarter under IFRS accounting standards, Tata Consultancy said in a press release after close of Mumbai trading on Tuesday.

Tata Consultancy and India's other top IT companies, including Infosys Ltd. and Wipro Ltd., are changing to automate services that were previously done manually, as clients push for cost savings beyond outsourcing. They are also building capabilities to mine useful information from the terrabytes of data generated from social media to an ever increasing number of embedded sensors.

"The digital business has done very well," CEO N. Chandrasekaran told reporters at a press conference in Mumbai, discussing the results. Digital projects sales rose 4 percent over the September quarter, shoring up revenues in a quarter that traditionally sees fewer working days due to the year-end furloughs. Overall, the digital program implementations now account for 13.7 percent of Tata Consultancy's revenues, Chandrasekaran said. For instance, an automobile manufacturer has selected TCS "to transform  customer experience in connected cars," the Indian IT company said in its press release. The company didn't name the customer.  Chandrasekaran added: "Digital will remain the core focus for enterprise IT in 2016 as our customers respond to competition in a global economy driven by real-time insights."

Sales rose 11.7 percent to Rs 27,360 crore for the third quarter, versus Rs 24,500 crore in the same period a year ago. During the quarter, TCS won nine large orders, he said. India's top IT companies define such orders as typically of $50 million or higher in total contract value. Sales in North America rose 1.4 percent sequentially over the September quarter and 2.5 percent in Europe, he said.

In September, TCS said won an order from UK financial company Nationwide Building Society to implement Ignio, a human-neural-networks-inspired software program that learns on the go and reduces manual intervention in various IT processes. Ignio is receiving significant traction, we have gone live with the deals we announced last quarter and we have done some more deals this quarter," Chandrasekaran said.

"We are now in the digital business era," Arup Roy, a research director at Gartner Inc., said in an interview ahead of Tata Consultancy's results. Gartner, a technology market researcher and consultancy, estimates 38 percent of spending on technology is originating from business buyers such as chief marketing officers, heads of supply chain, human resources bosses others.

As a result, the Indian IT services providers have to adapt to speak the language of leaders other than chief information officers, Roy said. Tata Consultancy CEO Chandrasekaran has pointed out that the digital transformation area has evolved from customers asking for limited-scope projects such as developing a mobile phone application to programs that will generate decision-support information from across multiple business operations.

It is also an area that is growing at a faster clip than conventional IT services outsourcing, which has prompted TCS and its rivals to step up related recruitment and training. In October, TCS said it had raised target of hiring to 75,000 recruits this fiscal year, versus the 60,000 to 65,000 estimate it started the year with.

While the Indian technology services providers see opportunity in the digital world, they face headwinds in the political world as the U.S., their biggest market, heads into elections this year. An early estimate by the National Association of Software and Services Companies, the Indian IT industry lobby, projects an additional annual cost of $400 million on the sector from a visa fee hike the Indian companies may face in the U.S.

Outsourcing to India is seen in America as a practice that takes away jobs from Americans and efforts to curb it have included a proposal to place a near-ban on the outplacement at client sites of Indian staff holding H1-B or L1 visas, the two non-immigrant work permits that Indian IT companies are most heavily reliant on.

Infosys, India's second-largest software services provider, is set to announce its December quarter results on Jan. 14 and third-ranked Wipro will report its earnings on Jan. 18.